10:54 AM May 30, 1996


Geneva 30 May (Chakravarthi Raghavan) -- Full employment should be retained as a priority objective of economic and social policies and it remains the best available means of ensuring equity and social cohesion, says the International Labour Office in a report for the 83rd session of the International Labour Conference opening next week.

The tripartite ILC meet has on its agenda for general discussion the subject of "Employment Policies in a global context".

Since the subject was put on the agenda (by a decision of the ILO Governing Body in March 1994), the Declaration at the 1995 Copenhagen World Summit for Social Development included among its ten commitments the objective of full employment.

The report examines available evidence and concludes that there is little basis for the views about 'jobless growth' being due to labour-displacing technical change or that revolutionary changes in the nature of work has rendered obsolete the concept of full employment itself.

The UNDP in its 1993 Human Development Report put forward this view about a jobless growth -- meaning increasing output without growth in employment or employment growth lagging far behind.

But the ILO report compares GDP and employment growth in the periods 1960-73 and 1974-95 to show that growth in fact has been more job-intensive, that pace of job creation has remained steady in the face of sharply reduced rate of economic growth and that relative capacities of American and European economies to create employment has not been affected.

And though response of employment to GDP growth has been weaker in the present recovery than earlier ones, it has still been positive and does not support the views about "end of work" or even beginning of a "jobless growth".

The rise in unemployment in the industrialized countries in the past two decades, the ILO says, has not been due to a fall in the employment content of growth but rather the result of faster growth of labour force and lower rates of economic growth.

Consequently, there is no reason to reject the objective of full employment and replace it with the alternative agenda of devising new social institutions to adapt to a future dearth of jobs.

"In any case," adds the ILO report, "the main proposals on the alternative agenda, such as delinking of income from work, are utopian."

Unless there is an imminent switch to higher growth as a result of new technologies, the proposal to delink income from work will face a serious problem of financial sustainability. and a guaranteed income delinked from need to work would alter the functioning of the labour market in a fundamental way -- greatly weakening the incentive to work, and no certainty that the required number of workers, albeit significantly reduced, could be mobilized to do the necessary work.

Full employment should thus be retained as a priority objective of economic and social policies: It remains the best available means of ensuring equity, of meeting peoples' aspirations for participation in economic and social life and preserving social cohesion, ensure full utilization of human and capital resources and maximisation of rate of growth of output and living stands.

High unemployment, on the other hand, breeds social exclusion and other social ills, increases poverty and inequality, inflicts a high cost on unemployed in terms of reduced well-being and represents a wasteful under-utilization of human and other productive resources.

This, the ILO says, is true of countries at all levels of development, even though the concept of 'full employment' may have to be interpreted differently in developing countries.

In the industrial world, the definition of full employment as a level of employment where all those seeking work can obtain it remains fundamentally valid, but may need to be updated in line with changes that have taken place in the structure of employment -- increasing share of female employment, emergence of freely chosen forms of flexible employment, and perhaps a higher turnover of jobs.

This implies the need for new polices and institutions, especially for ensuring employment security and social protection.

Full employment is no less important in developing countries, despite the fact that their structure of employment is very different from that in industrialized countries. In the developing world, only a minority of employed are in formal wage employment in the modern sector, while the rest are engaged in peasant farming, casual labour or low productivity self-employment in the informal sector.

Along with absence of unemployment benefits in these countries, this means full employment cannot be defined only in terms of a target rate of unemployment. But the progress towards the goal can be measured by using a combination of indicators -- rate of growth in modern-sector employment and changes in average earnings, and degree of unemployment in rural and informal sectors.

Given the widespread under-employment and poverty in developing countries, the goal of full employment in the sense of providing productive and decent employment for all seeking work is a long-term objective. But this does not detract from its usefulness as an over-arching policy objective and providing a framework for formulating policies for raising both the volume and quality of employment and also ensuring economic growth is equitable and poverty-reducing.

Achieving full employment is a challenging task requiring fundamental economic reforms in many countries and actions at international level.

The ongoing globalization of the world economy offers the potential for achieving worldwide higher output growth and employment. The expanding flows of international trade and investment provide for mutually beneficial expansion of markets and improved allocation of resources -- leading to an expanding global economy from which everyone can benefit. But to realize its full potential, actions are needed at international level to promote stable and open economic relationships among nations.

Among the actions required, the ILO report says, are:

* commitment from all countries to adhere to common rules of the game in maintaining open economic policies and refraining from those conferring on them an unfair competitive advantage;

Universal compliance with basic labour standards, ILO argues, will make an important contribution to preventing a resurgence of protectionism and ensuring equity in the face of rising international economic competition.

* enhanced coordination of macro-economic policies of industrialized nations to allow for higher growth in these countries and providing a major boost to growth in developing and transition economies;

* effective arrangements to overcome problems associated with increasing globalization of financial markets -- such as rapid growth of volatile short-term financial flows that destabilize economic growth and employment;

The arrangements should seek to reduce likelihood of financial crises in individual countries and limit contagion effects of such crises through more effective and timely arrangements for their resolution.

* provision of international assistance to the LDCs to enhance their capacity to compete successfully in the globalizing world economy, and helping to reverse their marginalization from the benefits of globalization and bringing about a desirable reduction in international inequalities and world poverty.

The report notes the lack of consensus in industrial countries on the causes of, or policies needed to overcome persistent high unemployment, widening wage inequalities and increasing labour market polarization.

An influential view attributes the persistent high unemployment to labour-market rigidities and over-generous levels of social protection, and sees a solution in labour market deregulation and reduction in levels of social protection.

The opposing view is that it is due to prolonged period of low growth in output and productivity, leading to low investment and inadequate productive capacity for growth in output and employment before inflationary pressures set in. Low productivity growth has also left much less room for non-inflationary resolution of competing income claims. The main solution, in this view, is in policies raising rate of growth in productive capacity, supported by efforts to ensure wage-settlements remain within macro-economic constraints.

As for the rise in wage inequality, the report says that while increasing trade with low-wage economies and skill-biased technical progress reducing demand for unskilled workers have played a part in the fall in relative wages of unskilled workers in the North, "they have not been the main culprits."

Changes in labour market institutions and prolonged periods of low growth and high unemployment have been much responsible. Higher growth, apart from reducing overall unemployment, will also contribute to a lowering of wage inequalities.

The report attributes the labour market polarization -- growth of low-paid and insecure jobs at lower end of the labour market -- to the shift in employment structure towards services sector and the increasing participation of female labour force. Both processes it sees as being driven by changes in employment strategies of enterprises to cope with increased uncertainty and instability in the macro-economic environment.

While the lack of agreement on causes of the employment problems in industrialized countries, makes it unlikely that any single set of policy prescriptions will gain general support, the report nevertheless argues for a strategy based on policies to restore higher rates of growth of output, productive capacity and productivity.

It will involve simultaneous implementation of macroeconomic policies for a higher and more stable level of demand and labour market policies to improve the employment prospects of low-skilled workers.

It will involve a strong and credible reduction in real interest rates, that will bring about a reduction in debt-servicing burden and reduction in fiscal deficits. Reduction in fiscal deficits and public debts should still remain a major medium-term objective, but the restrictive measures should be applied only after the economies are on a sustained path of higher growth.

A sustained reduction in public deficits and debt will be possible only with increased tax revenues from higher growth and savings on social security from lower unemployment.

At the same time, to maintain incentives to invest and to contain inflationary pressures, wage settlements must be kept within macro-economic constraints. Successful implementation of income policies and institutional mechanisms for regulating pay settlements are thus critical to the success of the strategy.

Similarly, the ILO says, financial markets will have to be reassured that the medium-term objective of deficit reduction is credible because of higher growth and sustained reduction of short-term interest rates. Stronger coordination of macroeconomic policies will also be required to ease external deficit problems and soften losses of competitiveness generated by inflationary tensions, at the same time as it reinforces credibility of the policies.

These macroeconomic policies however have to be accompanied by labour market policies to upgrade the skills and employability of low-skilled workers, especially those in long-term unemployment. Policies aimed at reducing cost of low-skilled workers, such as a reduction in payroll taxes applicable to them or targeted employment subsidies will also be important.

In the transition economies, where there has been significant progress in many countries in the reform process but has been uneven in others, the achievements have been uneven and there have been high social costs in terms of high levels of unemployment. Further reforms will imply further job losses and rise in unemployment.

A possible policy instrument for moderating job losses, the ILO suggests, could be recourse to selective rather than across-the-board and instantaneous import liberalization, coupled with selective export credits and subsidies to potentially competitive enterprises, the ILO says.

In developing countries, a critical condition for reversing the deterioration in employment conditions which many of them have experienced since early 1980s, is to restore higher and more stable growth rates. This alone can ensure the rate of growth of productive employment that is needed to cope with high rates of growth of labour force as well as to reduce share of low-productivity jobs in total employment, and thereby contribute to the alleviation of poverty.

In some, specially the LDCs in sub-Saharan Africa, basic condition for economic growth -- civil peace and minimal level of macro-economic stability -- remain to be established. In others, restoration of higher and sustained growth after the debt-related economic crises of the 1980s has still not been fully achieved. In these countries there is still considerable challenge in terms of economic reforms.

Apart from the growing economies of East and South-East Asia, economic reforms of varying degrees need to be implemented in many developing countries before they can benefit fully from globalization and achieve high and sustained growth. Successful reform is thus the cornerstone of efforts to put developing countries fully on the path of achieving full employment.

But as in the transition economies, the social costs of reform will be high. Jobs in uncompetitive activities will be destroyed faster than new jobs are created in new competitive activities.

There is thus a need for careful management of the pace and sequencing of economic reforms with a view to minimizing social costs. Trade liberalization can be managed more gradually and selectively, and combined with programmes to increase capacity of producers to respond to new market opportunities. These could include investment to remove bottlenecks in infrastructures, enhancing training systems to meet demand for new skills and improving access of small and medium enterprises to credit. It is also important to avoid errors in macroeconomic management that cause unwarranted contractions in output or provoke new exchange-rate and debt crises.

A controversial aspect of economic reform, the ILO says, is whether or not there is a need to undertake extensive deregulation of labour markets. The case for such deregulation rests on the claim that labour market regulations in developing countries mandate excessively high benefits and are highly distortionary.

But the evidence on key aspects of labour market regulation such as those relating to minimum wages, employment security, maternity protection, social security programmes and non-wage labour costs do not confirm this contention.

Whether or not there is a need for reform has to be ascertained from a case-by-case examination of the empirical evidence with the full involvement of the social partners.